Question

Jenks Company financed the purchase of a machine made by making payments of $25,000 at the end of five years. The appropriate rate of interest was 8%. What was the cost of the machine to Jenks?

Answer 1

To calculate the cost of the machine, we need to find the present value of the payments made by Jenks Company using the present value of an ordinary annuity formula. The cost of the machine to Jenks Company was approximately $90,998.82.

Step-by-step explanation:

To calculate the cost of the machine, we need to find the present value of the payments made by Jenks Company. Since the payments are made at the end of each year, we can use the formula for present value of an ordinary annuity:

Present Value = Payment × [1 - (1 + Interest Rate)-n] / Interest Rate

Using the given information, we can plug in the values:

Present Value = $25,000 × [1 - (1 + 0.08)-5] / 0.08

Simplifying the calculation will give us:

Present Value = $25,000 × [1 - (1.08)-5] / 0.08 ≈ $90,998.82

Therefore, the cost of the machine to Jenks Company was approximately $90,998.82.